Neo J. Tuytel, Fraser Litigation Group, General Editor
Krista Prockiw, Insurance Corporation of British Columbia, Associate Editor
VOLUME 33, NUMBER 5
Cited as 33 Can. J. Ins. L.
SEPTEMBER 2015
• “NOT MY FAULT”
CURRENT ISSUES UNDER THE DESIGN/WORKMANSHIP EXCLUSION
SEPTEMBER 2015 (PART 3) •
Gregory J. Tucker
Owen Bird Law Corporation
• In This Issue •
“NOT MY FAULT”
CURRENT ISSUES UNDER THE DESIGN/
WORKMANSHIP EXCLUSION
SEPTEMBER 2015 (PART 3)
Gregory J. Tucker .................................................. 65
DEFLECTING BLAME: ACCIONA
INFRASTRUCTURE CANADA INC. v. ALLIANZ
GLOBAL RISK US INSURANCE COMPANY
Krista Prockiw and Neo Tuytel .............................. 69
When Is Design or Workmanship
Faulty? The State of the Art
Standard
The standard that applies in determining whether
design or workmanship is “faulty” underwent a
potentially significant change as a result of the
decision of the Supreme Court of Canada in
Canadian National Railway Co. v. Royal and
Sun Alliance Insurance Co. of Canada [CN v.
1
Royal]. In summary, the standard for application
of the exclusion was revised from one of all foreseeable risks to one of state of the art. There was
some discussion, after that decision was handed
down, to the effect that the new standard might
unduly complicate the process of determining
when the exclusion applies.2 The concern was,
in part, that application of the state of the art
standard would turn many cases involving the
exclusion into quasi-negligence trials (albeit one
involving a state of the art standard rather than a
reasonable care standard).
Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
CANADIAN JOURNAL OF INSURANCE LAW
That does not appear to have occurred, based on
experience with the exclusion to date. Only two
decisions since CN v. Royal, both handed down
very recently, have considered the state of the art
standard: Verreault Navigation inc. v. Continental
3
Casualty Co. [Verreault] and Acciona Infrastructure Canada Inc. v. Allianz Global Risks US
4
Insurance Co. [Acciona]. Both reach unsurprising conclusions concerning application of the
state of the art standard. It may well turn out that
significance of the state of the art standard will
be restricted to very unusual situations involving
complex engineering and design on the frontiers
of existing knowledge. Before commenting on
the recent cases, it is worth describing both the
pre-existing all foreseeable risks standard and the
new state of the art standard.
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The Traditional Standard: All
Foreseeable Risks
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Traditionally, the standard applied to determine
whether design or workmanship is “faulty” is that
of “all foreseeable risks”. If the risk was “foreseeable”, then design or workmanship that failed
to accommodate that risk was “faulty”.5 Queensland Government Railways and Electrical Power
Transmission Property Ltd. v. The Manufacturers
6
Mutual Insurance Ltd. [Queensland] involved a
bridge designed to ensure that it would survive
the highest flood ever recorded on the site at
which it was built. A flood higher than that ever
recorded occurred, and the bridge failed. The
court found that risk of such an extreme flood
was not “reasonably foreseeable” in that such a
flood was very unlikely. But it was “foreseeable”
in that such a flood was possible. Accordingly, on
the foreseeability standard, design of the bridge
was “faulty”.
EDITORIAL BOARD
GENERAL EDITOR
Neo J. Tuytel, Fraser Litigation Group, Vancouver
ASSOCIATE EDITOR
Krista Prockiw, ICBC, Vancouver
EDITORIAL BOARD MEMBERS
Peter Aumonier, Vice-President, Claims,
Lombard Canada Ltd.  Professor Barbara
Billingsley, University of Alberta, Faculty of
Law  J. Bruce Carr-Harris, Borden Ladner
Gervais LLP, Ottawa  André Legrand, Norton
Rose Fulbright, Montréal  Lee Samis, Samis &
Company, Toronto  Michael S. Teitelbaum,
Hughes Amys LLP, Toronto
Note: This newsletter solicits manuscripts for consideration
by the General Editor, who reserves the right to reject any
manuscript or to publish it in revised form. The articles
included in Canadian Journal of Insurance Law reflect the
views of the individual authors. This newsletter is not
intended to provide legal or other professional advice and
readers should not act on the information contained in this
report without seeking specific independent advice on the
particular matters with which they are concerned.
Queensland was followed on this point in a number of Canadian cases involving unusual but
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Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
they carried out sophisticated work to develop a
system of seals in order to protect the bearings.
The sealing system, which could not be fully
tested, failed in operation. Bored material entered
the bearings, the bearings seized, and the machine suffered damage.
“foreseeable” conditions. Those conditions
include very high but foreseeable winds
(Willowbrook Homes (1964) Ltd. v. Simcoe &
7
Erie General Insurance Co. and very heavy but
foreseeable spring break-up of ice (Collavino Inc.
v. Employers’ Mutual Liability Insurance Co. of
8
Wisconsin).
10
During the trial, Justice Ground, applying the
traditional standard, found that the risk of differential deflection was not “foreseeable” and thus
the design was not faulty. The difficulty with that
finding, of course, was that the specific problem
of differential deflection was not only foreseeable, it was foreseen during the design process.
The fact that every reasonable precaution was
taken to accommodate this risk was not, on the
traditional standard, sufficient to avoid a finding
that the design was faulty. The Court of Appeal
11
overturned the trial decision on this basis.
One of the few Canadian cases to have found that
a design that failed had nonetheless taken into
account all foreseeable risks was Foundation Co.
of Canada Ltd. v. American Home Assurance Co.
9
[Foundation]. Foundation involved failure of a
cofferdam during construction of a bridge. The
cofferdam failed because of a rare combination of
a pocket of gas and slickenslide (a fractured clay
surface). The court made it clear that the standard
required a meeting of “extreme, but foreseeable,
circumstances”. Extensive engineering evidence
was called. The court found that, on the basis of
that evidence, the combination of factors that
caused failure of the cofferdam was so unusual
that it was simply not “foreseeable”. Thus, despite having failed, the design was not faulty or
defective.
The difficulty with the traditional analysis on the
facts in CN v. Royal is obvious. A design that did
not fully accommodate all foreseeable risks
would inevitably be faulty, no matter how difficult, specialized, or unprecedented the issue being faced. The standard is close to perfection.
The State of the Art Standard:
CN v. Royal
The Supreme Court of Canada, by a narrow majority, overturned the decision of the Court of
Appeal on the basis that pure “foreseeability”
should no longer be the standard. Instead, the
standard should be “state of the art”. Those risks
that would be foreseen applying a state of the art
standard must be dealt with applying “state of the
art” engineering and design principles. If those
steps are taken, design will not be faulty, even if
it fails.
The facts of CN v. Royal were unusual. The project was boring of a rail tunnel. Because of the
scale of the project the tunnel boring machine had
to be designed basically from scratch, specifically
for the project. One issue that arose during design
was how to deal with the risk of bored material
entering the machine’s main bearings. The unprecedented size of the machine gave rise to special problems in terms of ensuring that bored
material did not enter the bearings due to differential deflection in components of the machine.
The matter was addressed during the design
phase of the project. Experts were retained, and
The question then becomes, exactly what does
state of the art mean? This is discussed by Justice
Binnie, for the majority, at para. 55:
It is quite possible to evaluate the design (as distinguished
from the designer) as to whether it met the standard of an
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Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
ordinary, reasonable, cautious and prudent design, having
regard to what could be expected in the circumstances.
However, a design that survives a negligence test is not, on
that account, of a calibre sufficient to deny the insurers the
benefit of the exception. The insurers are entitled to the
benefit of the exemption unless the design met the very
highest of standards of the day and failure occurred simply
because engineering knowledge was inadequate to the task
at hand.
in connection with the state of the art standard is
also of interest. Acciona involved a project to
construct a new hospital wing. Construction utilized cast-in-place reinforced concrete slabs. The
concrete slabs, over time, began to exhibit excessive cracking and over-deflection. The slabs were
intentionally designed to be high at the centre
when initially constructed and then to undergo a
certain amount of deflection to become level.
However, the deflection did not stop at the intended point. The deflection continued, and the
slabs eventually sloped down towards the middle.
This raised no structural or safety issues, but, due
to the cracking and over-deflection, the slabs did
not meet the standards set out in the governing
contracts. As a result, substantial remedial work
had to be undertaken.
Accordingly, the state of the art standard is
higher than a negligence standard but below a
standard of perfection.
Cases since CN v. Royal Considering
the State of the Art Standard
The first case to consider the state of the art
standard was Verreault. In Verreault, the policies
in question were primary and excess marine construction liability policies issued in connection
with a project to refurbish a ferry owned by the
Government of Canada. The policies covered the
contractors’ legal liability in connection with the
project, but excluding liability arising from faulty
design. Part of the contract involved design and
installation of a new HVAC system. The HVAC
system did not operate to specifications, and, as a
result, the Government brought a claim against
12
the contractor. Insurers denied on the basis of
the faulty design exclusion. The insured opposed
the denial on the basis that the HVAC system
was designed to “state of the art”, in that it was
designed to certain industry codes. The court had
no trouble rejecting that argument. The codes on
which the insured relied were applicable in connection with buildings. Separate codes governed
an HVAC system for use in a vessel. Accordingly, the system clearly was not designed to “state
of the art”.
The builders’ risk policy issued in connection
with the project contained a design and workmanship exclusion on LEG 2 wording (set out
below). Insurers denied the claim on the basis of
the exclusion. Several issues were raised, including the question of whether there was any defect
in design or construction of the slabs. The insured
argued that there was no defective design or
workmanship within the meaning of the exclusion, as the slabs had been constructed to the
“state of the art”. Both the insured and insurers
called expert evidence concerning the specific
cause of the cracking and over-deflection. The
evidence accepted by Justice Skolrood was to the
effect that the construction involved slabs that
were thinner than would generally be the case.
That would be acceptable so long as certain specific procedures were followed in connection
with formwork and reshoring of the concrete during construction. Those procedures were not
followed. The court accepted expert evidence
that the analysis undertaken in connection
with the formwork/reshoring procedures was
There was more detailed consideration of the
state of the art standard in Acciona. While the
real significance of the decision is its treatment of
rectification costs, discussed below, the reasoning
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Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
3
“inadequate”. In those circumstances Skolrood J.
had little difficulty in concluding that the contractor’s work did not meet the state of the art
standard. Accordingly, there were defects in
workmanship within the meaning of the exclusion.
4
5
It appears that, at least to this point, the change in
standard does not appear to have given rise to
real difficulty. That may well continue to be the
case. CN v. Royal may turn out to be the rare
case, based on its unusual facts, in which there is
a difference between a design or workmanship
that accommodates all “foreseeable” risks and a
design or workmanship that is “state of the art”.
[Editor’s note: These materials were prepared
by Gregory J. Tucker of Owen Bird Law
Corporation, Vancouver, B.C., for the Continuing
Legal Education Society of British Columbia,
September 2015.
6
7
8
9
Gregory J. Tucker is with Owen Bird LC in
Vancouver. Mr. Tucker has a commercial
litigation practice, with a focus on insurance and
related matters.]
1
2
10
11
12
[2008] S.C.J. No. 67, 2008 SCC 66, [2008] 3 S.C.R. 453.
See, for example, Miller, “Canadian National Railway
v. Royal and SunAlliance, New Certainty for Faulty
Design”, Insurance Law Conference–2009.
[2014] J.Q. no 6078, 2014 QCCS 2879 (in French).
[2014] B.C.J. No. 2137, 2014 BCSC 1568.
There has been obiter comment in some cases that
while the standard in connection with design was
“foreseeability”, the standard in connection with
workmanship was “reasonable foreseeability” so that
workmanship would be “faulty” only where there was
negligence. Cases that raised this possibility, based on
certain comments by one member of the court in
Queensland, include the decision of the B.C. Court of
Appeal in B.C. Rail Ltd. v. American Home Assurance
Co., [1991] B.C.J. No. 697, 79 D.L.R. (4th) 729. The
notion of such a distinction has been rejected in other
cases, including Foundation, and in texts, including
Brown and Menezes, Insurance Law in Canada
(p. 20.34). Any debate on this point has likely been ended by the decision in CN v. Royal and in Acciona, in
which the court concluded that the state of the art standard should apply to workmanship as well as design.
[1969] 1 Lloyds Rep.214 (Aust. H.C.).
[1980] A.J. No. 855, [1980] I.L.R. 876 (C.A.).
[1984] O.J. No. 1011, 5 C.C.L.I. 94 (H.C.J.), aff’d
[1985] O.J. No. 227 (C.A.).
[1995] O.J. No. 2164, 25 O.R. (3d) 36 (Gen. Div.), aff’d
[1997] O.J. No. 2332 (C.A.).
[2004] O.J. No. 4086, [2004] O.T.C. 851 (Ont. Sup. Ct. J.).
[2007] O.J. No. 1077, 2007 ONCA 209.
Interestingly, the coverage provision under which the
claim was made did not include any requirement that
the claim be as a result of property damage. Accordingly, cover was triggered, subject to the design exclusion,
as a result of the Government of Canada’s claim that the
system was defective.
• DEFLECTING BLAME: ACCIONA INFRASTRUCTURE CANADA INC. v.
ALLIANZ GLOBAL RISK US INSURANCE COMPANY •
Krista Prockiw, Legal Counsel, ICBC
Neo Tuytel, Senior Partner, Fraser Litigation Group
In a recently released decision of Acciona Infrastructure Canada Inc. v. Allianz Global Risk US
1
Insurance Company, the British Columbia Court
of Appeal addressed the application of the now
common defects in workmanship exclusion.
issued by Allianz Global Risk US Insurance
Company (the “Insurer”) for damage to concrete
slabs utilized in the construction of a new patient
care facility at the Royal Jubilee Hospital in
Victoria, British Columbia.
There, Acciona Infrastructure Canada Inc. (the
“Insured”) sought recovery of $14,952,439 under
a Course of Construction Policy (the “Policy”)
Certain concrete slabs developed over-deflection,
resulting in concave recessions in the centre
as well as bending and cracking of the slabs.
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Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
Engineering tests confirmed that the slabs as designed and constructed met applicable standards
and design load requirements and were accordingly safe. However, they were deficient from a
functional standpoint, as the uneven floors were
unacceptable to the hospital and were not in
accordance with the underlying design/build
contract. As a result, the slabs were ground down
to make them flat, a process that involved considerable cost.
physical loss of or damage to the property insured
(including general average and salvage charges)
and further provided that
1. PROPERTY INSURED:
This Policy insures:
(a) property in course of construction, installation,
erection, start up, testing and commissioning,
reconstruction or repair whilst at the risk of the Insured
and whilst at the location of the said construction,
installation, erection, reconstruction or repair
operations (hereinafter called the “Construction
Operations”);
It was held by the trial judge that the overdeflection and cracking of the slabs was not
caused by defective design but by defective
formwork and re-shoring procedures during
construction. This finding was not challenged on
appeal.
(b) property of every kind and description (including
but not limited to materials and supplies, valuable
papers or records, scale models of construction or
work insured hereunder) used or to be used in a part
of, or incidental to, the construction operations
wherever the said property may be located within the
Continental United States of America, and Canada,
and whilst in transit or storage within and between
Canada and the Continental United States of America
on or over land or inland waters.
The trial judge held that the direct costs incurred
to remedy the damage to the concrete slabs fell
within the grant of coverage under the Policy and
that while there was an exclusion for defects in
design and workmanship, such exclusion only
operated to exclude costs that would have been
incurred to remedy any defects prior to damage
occurring, which costs were minimal. The trial
judge denied recovery for certain indirect costs
paid to third parties and additional overhead costs
and reduced the insured’s recoverable profit margin for a total award of $8,514,931.
The Policy defined occurrence as
For the purposes of the insurance under this Policy, an
occurrence shall be defined as a loss or a series of losses
which are attributable to one disaster or cause. All such
losses shall be added together and the total amount of such
losses shall be treated as one loss.
On appeal, the Insured argued that the slabs met
applicable standards and design load requirements and were accordingly safe and further that
the fact that they were not up to the serviceability
standard does not mean they had suffered physical loss or damage. They argued that the building
merely became less useful and that the Insured
suffered an economic loss but no property
damage.
On appeal, the Insurer argued that the trial judge
erred in finding that the damage to the concrete
slabs came within the grant of coverage by constituting “direct physical loss of or damage to the
property insured” and further erred in holding
that the damage was not excluded by virtue of the
defective workmanship exclusion.
The Court of Appeal distinguished the English
and Australian authority cited by the Insurers and
upheld the trial judge’s reasons, holding that in
this case there was more than a mere “functional
2
inutility” and that “(t)he slabs suffered ‘physical
Scope of Coverage
The grant of coverage contained in the Policy
provided coverage against “ALL RISKS of direct
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Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
rectify a defect in workmanship immediately before that
defect caused damage to the insured property. His critical
finding that defects in the framing and shoring
workmanship resulted in damage to the slabs was not
challenged on appeal. Given that finding, the floor slabs
cannot be considered to be a “portion of the insured
property containing any of the said defects” within the
meaning of the Defects Exclusion.
loss’ and ‘damage’ within the ordinary meaning
of those words, read in the context of the Policy
3
as a whole”.
Exclusion
The Policy contained a Defects Exclusion, which
excluded from coverage the following:
[62] In other words, there was no defect in the slabs that
could have been rectified in order to prevent the overdeflection, bending and cracking. The defect was in the
workmanship. The judge found that if the defect in the
workmanship had been identified early enough, there
would have been no material additional costs to
implementing appropriate workmanship. There was no
evidence of such costs. It was a coincidence, in this case,
that the necessary rectification costs were equivalent to the
avoidance costs—but this does not mean the judge
misinterpreted the Defects Exclusion to generally exclude
only avoidance costs [emphasis in original].
(b) all costs rendered necessary by defects of material
workmanship, design, plan, or specification, and should
damage occur to any portion of the Insured Property
containing any of the said defects the cost of replacement or
rectification which is hereby excluded is that cost which
would have been incurred if replacement or rectification of
the Insured Property had been put in hand immediately
prior to the said damage.
For the purpose of this policy and not merely this exclusion
it is understood and agreed that any portion of the Insured
Property shall not be regarded as damaged solely by virtue
of the existence of any defect of material workmanship,
design, plan or specification.
Claim for Subcontractor Costs
The trial judge had interpreted this exclusion to
exclude only “those costs that would have remedied or rectified the defect immediately before
any consequential or resulting damage occurred,
but the exclusion does not extend to exclude the
cost of rectifying or replacing the damaged property itself; the excluded costs crystallize immediately prior to the damage occurring and are thus
limited to those costs that would have prevented
4
the damage from happening”. As such the trial
judged held that “the excluded costs are those
that would have remedied or rectified the defect
before the cracking and over deflections occurred
i.e the costs of implementing proper formwork
and shoring/reshoring procedures or incorporating additional camber into the formwork [empha5
sis in original]”.
The Insured cross-appealed the trial judge’s finding that $4,050,949 of increased subcontractor
costs were not covered by the Policy.
The Court of Appeal found no error in the trial
judge’s reasons holding as follows:
The Court of Appeal agreed with the trial judge’s
assessment that the Policy covered only direct
losses to the property insured and that the additional subcontractor costs were of a different nature and did not arise out of the damage to the
The Policy contained a Limit of Liability Clause
which stated that “(i)n the event that any of the
property insured be lost or damaged by the perils
insured against, the Insurer will indemnity the
Insured against the direct loss so caused”. The
Insured argued that the trial judge failed to appropriately consider this clause and that once it
has been determined that the property had been
damaged by an insured peril, all proximate losses
are covered and that such proximate losses
include both costs incurred to remediate the damage and economic losses suffered to mitigate
further loss to the insured property proximately
caused by the insured peril.
[61] I discern no error in the trial judge’s reasoning. The
trial judge interpreted the Defects Exclusion to exclude
from coverage the costs that would have been necessary to
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Canadian Journal of Insurance Law
September 2015 Volume 33, No. 5
purview of normal risks of poor workmanship or
was unexpected and fortuitous.
slabs but rather arose out of the Insured’s contractual obligations thus falling outside the scope
of coverage.
These factors were not considered in Acciona,
and it may be that the apparent inconsistency of
these decision can be explained by the differences in policy wording for each of the faulty
workmanship/defects exclusions and is thus not
of import. However, such inconsistency may
pave the way for an appeal of the Acciona decision to the Supreme Court of Canada.
Appellate Inconsistency?
In Ledcor Construction Limited v. Northbridge
6
Indemnity Insurance Company [Ledcor],
the Alberta Court of Appeal considered a faulty
workmanship exclusion, which excluded from
coverage
[t]he cost of making good faulty workmanship,
construction materials or design unless physical damage
not otherwise excluded by this policy results, in which
7
event this policy shall insure such resulting damage.
[Editor’s note: Krista Prockiw is the associate
editor of Canadian Journal of Insurance Law and
has practiced in the area of insurance defence
since her call to the bar in 1999.
In Ledcor, the Alberta Court of Appeal held that
under the above exclusion the presumptive test is
that damage, which is physically or systemically
connected to the very work being carried on, is
not covered. Whether coverage is nevertheless
extended as being resultant damage depended
upon a number of factors including (1) the extent
or degree to which the damage was to a portion
of the project actually being worked on at the
time, or was collateral damage to other areas;
(2) the nature of the work being done, the relation
of the damage to the way that work is normally
done, and the extent to which the damage is a
natural or foreseeable consequence of the work
itself; and (3) whether the damage was within the
Neo Tuytel is a founding partner of Fraser Batkin
Hanson Tribe Tuytel LLP, a commercial litigation boutique. He was called to the bar in 1985
and most frequently represents insureds regarding
enforcement of coverage.]
1
2
3
4
5
6
7
72
[2015] B.C.J. No. 1672, 2015 BCCA 347.
Ibid., para. 53.
Ibid., para. 38.
Ibid., para. 59.
Ibid.
[2015] A.J. No. 338, 2015 ABCA 121.
Ibid., para. 4.